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Financial weakness argument flops in ProMedica merger case


By Joe Carlson
Posted: April 22, 2014 - 8:00 pm ET
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In 2010, St. Luke's Hospital in northwestern Ohio wasn't doing great financially, but it wasn't about to go broke either—a common state of affairs for hospitals that greatly damaged St. Luke's argument that it needed to merge to survive.

In a widely anticipated decision (PDF), the 6th U.S. Circuit Court of Appeals in Cincinnati on Tuesday refused to overturn a Federal Trade Commission order for St. Luke's to unwind a deal that made it part of ProMedica, a large Toledo-based health system.

The FTC said the merger would lead to higher prices for consumers. The hospitals countered that the commission used faulty economic models to reach that conclusion, but the 6th Circuit judges sided categorically with the government.

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ProMedica is poised to take its argument to the U.S. Supreme Court, where any case faces a slim chance of getting selected for review. “We are committed to exhausting all of our legal options,” the system said in a statement.

In the meantime, one of the most notable aspects of Tuesday's ruling for hospitals was the court's rejection of St. Luke's so-called “weakened firm” defense, antitrust experts said.

Writing for a three-judge panel of the federal appeals court, Judge Raymond Kethledge called the argument “the Hail-Mary pass of presumptively doomed mergers—in this case thrown from ProMedica's own end zone.”

Like many hospitals across the country, St. Luke's had been working to slowly improve a lackluster bottom line while also pursuing stability through a merger. By the time St. Luke's merged with ProMedica, in May 2010, the hospital had reversed years of operating losses and was on a path toward a positive margin that it recorded several months later.

So when the Federal Trade Commission challenged the merger in January 2010, St. Luke's couldn't argue that the deal should be allowed as the only means to keep a struggling hospital afloat, even if it might otherwise violate antitrust laws. Instead, hospital attorneys could only say St. Luke's was “weakened,” not in dire jeopardy, because it didn't have to eliminate any service lines to stay in business. And that argument went nowhere in court.

Evidence presented in the case, Kethledge wrote in the opinion, showed that St. Luke's had enough cash reserves before the deal to pay its obligations and that its market share was on the rise.

“The 6th Circuit didn't engage with that argument. And I think that is concerning for hospital executives,” said Douglas Ross, an antitrust lawyer with Davis Wright Tremaine in Seattle.

The lesson many executives will draw, he said, is that “unless a hospital is about to go out of business, the merger rules don't change, and (the hospital) should think about cutting services first before looking for a merger that would get antitrust attention.”

The victory in the ProMedica case, which involved 30 days of testimony and more than 2,600 exhibits at the administrative-court level alone, is likely to burnish the reputation of the FTC in the healthcare world.

“I think the FTC clearly has reestablished itself as a very credible enforcer, particularly in hospital mergers,” said Matthew Cantor, an antitrust partner with Constantine Cannon in New York. “Hospitals that get to the stage of the FTC rattling its cage are going to have to take that very seriously, because the FTC's track record is very good.”

The FTC won a U.S. District Court case in Boise, Idaho, earlier this year in which it challenged the acquisition of a large multispecialty practice by the state's largest healthcare provider, St. Luke's Health System. And last year the agency won a case at the Supreme Court involving the right of a public hospital authority in Albany, Ga., to buy its only competitor in a six-county area. Those court wins follow a string of hospital mergers that were called off in the past few years after the FTC threatened litigation.

“The FTC's vigilant enforcement of the antitrust laws in healthcare provider markets helps deliver lower cost, higher quality health care to consumers,” FTC Chairwoman Edith Ramirez said in a statement after the ProMedica decision was announced. “The 6th Circuit's decision affirming the commission's ruling is a victory for the residents of Lucas County, Ohio, and ensures that they will continue to benefit from competition.”

Follow Joe Carlson on Twitter: @MHJCarlson


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